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Jeff Kagan: Status Report on Vonage VoIP

Vonage (VG) is one of the older VoIP companies that entered the scene more than a decade ago. At the time we didn’t know whether or not they would become a long lasting option. Now a decade later they are bigger than ever on the consumer side and making aggressive moves into the business side of the market. So what can we expect Vonage going forward? You may be surprised.

When Vonage started about a decade ago they were, well, an annoying little company buzzing around the faces of the major Baby Bells, offering a new-fangled “voice over the Internet” service. Quality was so-so. Customers signed up for the service to cut their phone bills a bit, but it was a trade-off.

I met CEO Jeffrey Citron at a trade show and we spoke about the future of the industry and the future of Vonage. He saw Vonage as a glowing success story, which it was as an investment, but at the time it also had loads of quality issues and problems. I liked his spirit, but thought it would be a while before Vonage would ever grow into a meaningful competitor.

However as VoIP improved over the years, so did Vonage. Sure they still have problems, which I will discuss, but as years passed the problems had less to do with Vonage and more to do with limited bandwidth of some customers.

The question back then was simple, was it worth the savings if you didn’t have a good quality call? Today I still get many calls from reporters using a VoIP service. Sometimes the quality is good. Sometimes it is terrible. None are ever as good as a local phone line.

I learned VoIP quality issues came from two areas. One was the VoIP provider and the technology they use, and two with the slower Internet connections many customers use. This Internet connection does not come from Vonage.

Some customers have a very fast, very high quality Internet service. Others have a much slower and less expensive service. The more expensive and faster service is better for VoIP. Slower, less expensive service can cause real quality problems with VoIP.

In recent years as Internet connections sped up from all the phone companies and cable television companies, things did get better. And as speeds continue to increase, things should continue to get better.

Certain VoIP services that had better quality began to stand out. Vonage was one of them. Not all competitors are. Today Vonage continues to grow. Perfect? Of course not. But they are better than ever and improving every year.

So VoIP, while not perfect, is going to continue to be a growing part of the market. Not every VoIP carrier has the same quality problems.

Cable television companies like Comcast ($CMCST),Time Warner Cable (TWC) and Cox offer great quality VoIP services. So do the telephone companies like AT&T (T) Uverse, Verizon (VZ) FiOS and CenturyLink Prism who also sell VoIP services in addition to their regular telephone lines. They also combine television, Internet and phone.

These big competitors offer excellent quality VoIP telephone service because they offer their own high-quality and high-speed Internet lines. That can make the different between a poor or good quality call.

Vonage is not a cable television company. Vonage is not a telephone company. So Vonage does not offer high-speed Internet lines. Yet they require high-speed lines to operate with good quality.

Where do you get this high-speed connection? That’s up to the customer. Customers with good quality and fast connections have better quality VoIP calls. Customers with poor quality or slower connections often have worse quality calls.

So when you complain about a lousy connection, first try and decide if it’s the VoIP service, or the high-speed connection.

Vonage has worked to improve their quality over the years and has had success. Not perfect, but better every year. If a customer has a fast and good quality Internet connection, then Vonage can be a good choice.

And as Internet speeds continue to increase, things should continue to get better for companies like Vonage.

Now Vonage is getting into the business side of the marketplace. This is helpful to them because most businesses do have a more expensive, better quality and faster connection than most consumers. They do this because quality and speed are a reflection on their business. They also have multiple people who use the service.

So when Vonage business service is hooked up to a business, the majority of their customers are still small and mid size businesses. That’s good.

So having enough bandwidth is still key to a good quality call for consumers or business customers. That’s where this ultra-fast Internet will be very helpful as it begins to roll out.

With all that said, Vonage Holdings Corp. acquired a company called Vocalocity in the Atlanta area last year for $130 million. Now Vonage is also a business services company.

Vonage is growing. Their new Business Solutions (Vocalocity) is staying put in Atlanta. They are hiring and rapidly growing. Atlanta has a powerful high tech business community.

The opportunity is huge in the business market on a nationwide basis if they do things right going forward.

Marc Lefar is Vonage CEO now. I knew him back in the Cingular days. Cingular today is called AT&T Mobility. He still lives in Atlanta and commutes to the New Jersey HQ of Vonage. Now Lefar has a reason to spend more time in Atlanta. They are rapidly building out this business solutions segment.

They must continue to work to improve and solve the VoIP problems, the need for high-speed network connections, and build their brand both on the consumer side and the business side of the fence.

VoIP is a large and growing business segment. It is full of large companies and small companies. So if Vonage can continue to build its brand, there is an opportunity. Of course this same opportunity is there for all Vonage competitors as well. There are many, small companies in the same space like RingCentral, 8X8, Jive, VoIP.com, Magic Jack and more.

So in this space full of small companies competing with each other and bigger competitors like the baby bells and cable television companies, building a competitive service and well known brand name and relationship with the marketplace is key.

This means VoIP is in flux, as always. However Vonage seems to remain on the growth track. We’ll keep our eyes on them and see how well they all do going forward.

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